Saving For the Next Car

Kristi finally paid off her vehicle. She's saving for a new vehicle. Where should she put the money while she saves for the next five years?

QUESTION: Kristi from My Total Money Makeover finally paid off her vehicle. She’s saving for a new vehicle. Where should she put the money while she saves for the next five years? Dave doesn’t advise mutual funds and instead recommends a savings account or money market account.

ANSWER: You won’t have a penalty on mutual funds, but the problem with mutual funds is they go up and down. If you’re not going to leave the money alone at least five years for a long-term investment, I don’t use mutual funds. In saving for a car, it’s very unusual to save for a car for five or six years. I would probably use a simple savings account—money-market-type account—which basically pays nothing right now, but at least it’s not going down in value and you’re not fighting with this stock market trying to figure out whether or not you’re going to get to buy a car because some goober on Wall Street flipped a switch.

I love mutual funds for long-term investments, but I do not like them as a savings account vehicle. I would lead you away from them. It is a great idea to save up and pay cash for a car. The average car payment in America is $487 right now. If you put that much into a cookie jar, in 10 months, you’d have right at $5,000—$4,870. How much car can you buy for $5,000 in America? Can you get a pretty good Chevrolet Cavalier, Ford whatever, or Honda Accord for $5,000? You can, can’t you? It’s not a great car, but it’s a step above a hooptie. That’s 10 months of saving a car payment at no interest. If you did that for 10 more months, could you put another $5,000 with it and move to a $10,000 car in only 10 months—less than two years in? Sure you could. This is what Grandmother did. She said, “Save up and pay for it. If you don’t have the money to pay for it in full, it means you can’t afford it.” “I can afford it” does not mean make the payments. Get yourself out of debt and stay out of debt.

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